Thanks to relaxed lending standards, in recent years borrowers with bad credit – such as a [tag]bankruptcy[/tag] or a [tag]delinquent loan[/tag] on their record – found it relatively easy to get home mortgages. Such “subprime” borrowers generally have to fork over higher interest payments to compensate the lender for the added risk of default they represent. So lots of subprime borrowers kept their house payments lower by taking out exotic mortgages such as [tag]adjustable-rate[/tag], [tag]interest-only[/tag] or [tag]negative-amortization mortgage[/tag]s.

During the housing boom, borrowers and lenders took comfort in the fact that home prices rose and rose, with no signs of slowing. Even if a borrower had an interest-only loan, the rising value of the home would build equity for the owner. But with home prices falling in many parts of the country, that safety net has been eliminated. And with interest rates rising, borrowers with adjustable-rate mortgages are facing higher monthly payments and, increasingly, foreclosure.

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